Strategic Investment Risk · A. Investment objectives should be return driven, for example based on the overall targets of the business and the implied investment return required

24/11/2015

1

Strategic Investment Risk James Kenney, Novae

Henry Ashworth, BlackRock

11/24/2015

Colour palette for PowerPoint

presentations

Dark blue

R17 G52 B88

Gold

R217 G171 B22

Mid blue

R64 G150 B184

Secondary colour palette

Primary colour palette

Light grey

R220 G221 B217

Pea green

R121 G163 B42

Forest green

R0 G132 B82

Bottle green

R17 G179 B162

Cyan

R0 G156 B200

Light blue

R124 G179 B225

Violet

R128 G118 B207

Purple

R143 G70 B147

Fuscia

R233 G69 B140

Red

R200 G30 B69

Orange

R238 G116 29

Dark grey

R63 G69 B72

Contents

• Introduction.

• How important is investment strategy in general insurance?

• What are the key elements of investment strategy?

• How should we measure investment risk when considering strategy?

• Strategic interest rates positioning.

• What about the practical considerations?

11/24/2015 2

24/11/2015

2


presentations

Dark blue

R17 G52 B88

Gold

R217 G171 B22

Mid blue

R64 G150 B184



Light grey

R220 G221 B217

Pea green

R121 G163 B42

Forest green

R0 G132 B82

Bottle green

R17 G179 B162

Cyan

R0 G156 B200

Light blue

R124 G179 B225

Violet

R128 G118 B207

Purple

R143 G70 B147

Fuscia

R233 G69 B140

Red

R200 G30 B69

Orange

R238 G116 29

Dark grey

R63 G69 B72

How Important is Investment Strategy?

Perhaps less than for other institutional investors

But…

– Pressure on renewal rates

– Competition from alternative capital providers – hedge fund

model

– Economic conditions – low interest rate environment

Have increased the focus on investment strategy.

11/24/2015 3


presentations

Dark blue

R17 G52 B88

Gold

R217 G171 B22

Mid blue

R64 G150 B184



Light grey

R220 G221 B217

Pea green

R121 G163 B42

Forest green

R0 G132 B82

Bottle green

R17 G179 B162

Cyan

R0 G156 B200

Light blue

R124 G179 B225

Violet

R128 G118 B207

Purple

R143 G70 B147

Fuscia

R233 G69 B140

Red

R200 G30 B69

Orange

R238 G116 29

Dark grey

R63 G69 B72

Question 1

“My company’s investment strategy directly affects my area

of the business.”

• Yes

• No

11/24/2015 4

24/11/2015

3


presentations

Dark blue

R17 G52 B88

Gold

R217 G171 B22

Mid blue

R64 G150 B184



Light grey

R220 G221 B217

Pea green

R121 G163 B42

Forest green

R0 G132 B82

Bottle green

R17 G179 B162

Cyan

R0 G156 B200

Light blue

R124 G179 B225

Violet

R128 G118 B207

Purple

R143 G70 B147

Fuscia

R233 G69 B140

Red

R200 G30 B69

Orange

R238 G116 29

Dark grey

R63 G69 B72

Question 2

“Input from my area of the business should be taken into

consideration when determining investment strategy.”

• Yes

• No

11/24/2015 5


presentations

Dark blue

R17 G52 B88

Gold

R217 G171 B22

Mid blue

R64 G150 B184



Light grey

R220 G221 B217

Pea green

R121 G163 B42

Forest green

R0 G132 B82

Bottle green

R17 G179 B162

Cyan

R0 G156 B200

Light blue

R124 G179 B225

Violet

R128 G118 B207

Purple

R143 G70 B147

Fuscia

R233 G69 B140

Red

R200 G30 B69

Orange

R238 G116 29

Dark grey

R63 G69 B72

Investment Strategy is Integral to a

General Insurance Business

• Shareholder Capital : Total Assets Invested

– investment return has geared impact on RoE

• Solvency II reserves are discounted

– creates an implied net investment return hurdle

• Pricing of business should consider return expectations

• Capital efficiency

– Balance between 1:200 and more central expectations

• Dynamic capital allocation

– requires knowledge of marginal risk/return characteristics

11/24/2015 6

24/11/2015

4


presentations

Dark blue

R17 G52 B88

Gold

R217 G171 B22

Mid blue

R64 G150 B184



Light grey

R220 G221 B217

Pea green

R121 G163 B42

Forest green

R0 G132 B82

Bottle green

R17 G179 B162

Cyan

R0 G156 B200

Light blue

R124 G179 B225

Violet

R128 G118 B207

Purple

R143 G70 B147

Fuscia

R233 G69 B140

Red

R200 G30 B69

Orange

R238 G116 29

Dark grey

R63 G69 B72

Reserving and Pricing effect Investments

82

84

86

88

90

92

94

96

98

100

102

T=0 T=1 T=2 T=3

Simple Cash-flow Chart

Undiscounted Liabilities Discounted Liabilities

Discounting creates an

investment return hurdle rate

Pricing also impacts implied

investment return hurdle rate

11/24/2015 7


presentations

Dark blue

R17 G52 B88

Gold

R217 G171 B22

Mid blue

R64 G150 B184



Light grey

R220 G221 B217

Pea green

R121 G163 B42

Forest green

R0 G132 B82

Bottle green

R17 G179 B162

Cyan

R0 G156 B200

Light blue

R124 G179 B225

Violet

R128 G118 B207

Purple

R143 G70 B147

Fuscia

R233 G69 B140

Red

R200 G30 B69

Orange

R238 G116 29

Dark grey

R63 G69 B72

Basic Investment Management Model

11/24/2015 8

Overall Business Strategy

Strategic Investment Objectives

Investment Strategy

Implementation & Management

24/11/2015

5


presentations

Dark blue

R17 G52 B88

Gold

R217 G171 B22

Mid blue

R64 G150 B184



Light grey

R220 G221 B217

Pea green

R121 G163 B42

Forest green

R0 G132 B82

Bottle green

R17 G179 B162

Cyan

R0 G156 B200

Light blue

R124 G179 B225

Violet

R128 G118 B207

Purple

R143 G70 B147

Fuscia

R233 G69 B140

Red

R200 G30 B69

Orange

R238 G116 29

Dark grey

R63 G69 B72

Why set an Investment Strategy?

11/24/2015 9

Good investment outcomes Poor investment outcomes

Investments are well managed and

understood:

• Unrewarded risks are avoided

• Poor investment outcomes can be

explained, impacts may be managed

Investments are poorly managed:

• Business changes or market movements

have unexpected impacts

• Liquidity is poorly managed or understood

• Portfolio managers have clear and

appropriate guidelines

• Portfolio managers have scope to take

advantage of appropriate opportunities

• Portfolio managers are over-constrained

and cannot take advantage of market

opportunities

• Portfolio managers pursue inappropriate

opportunities


presentations

Dark blue

R17 G52 B88

Gold

R217 G171 B22

Mid blue

R64 G150 B184



Light grey

R220 G221 B217

Pea green

R121 G163 B42

Forest green

R0 G132 B82

Bottle green

R17 G179 B162

Cyan

R0 G156 B200

Light blue

R124 G179 B225

Violet

R128 G118 B207

Purple

R143 G70 B147

Fuscia

R233 G69 B140

Red

R200 G30 B69

Orange

R238 G116 29

Dark grey

R63 G69 B72

What is Investment Strategy?

• An action plan…

• …that aims to

achieve the strategic

investment

objectives…

• …while being

consistent with the

investment policy.

11/24/2015 10

Portfolio

Objectives

Portfolio

Construction

Portfolio

Maintenance

Portfolio Risk

Analysis

Monitoring,

Reporting,

and

Performance

Attribution

Liability

analysis

Capital

considerations

Regulatory

constraints

Cash flow

matching

Liquidity Collateral

considerations

P&L

restrictions

Risk budget

24/11/2015

6


presentations

Dark blue

R17 G52 B88

Gold

R217 G171 B22

Mid blue

R64 G150 B184



Light grey

R220 G221 B217

Pea green

R121 G163 B42

Forest green

R0 G132 B82

Bottle green

R17 G179 B162

Cyan

R0 G156 B200

Light blue

R124 G179 B225

Violet

R128 G118 B207

Purple

R143 G70 B147

Fuscia

R233 G69 B140

Red

R200 G30 B69

Orange

R238 G116 29

Dark grey

R63 G69 B72

What is Strategic Asset Allocation?

11/24/2015 11

Strategic

• multi-year

• risk premia

• committee governance

Dynamic

• medium term

• relative to SAA

• fundamentally driven…

• …but cognisant of current pricing.

Tactical

• short term

• cash benchmark

• driven by current pricing

• requires dedicated PM


presentations

Dark blue

R17 G52 B88

Gold

R217 G171 B22

Mid blue

R64 G150 B184



Light grey

R220 G221 B217

Pea green

R121 G163 B42

Forest green

R0 G132 B82

Bottle green

R17 G179 B162

Cyan

R0 G156 B200

Light blue

R124 G179 B225

Violet

R128 G118 B207

Purple

R143 G70 B147

Fuscia

R233 G69 B140

Red

R200 G30 B69

Orange

R238 G116 29

Dark grey

R63 G69 B72

Question 3

Regarding your businesses investment objectives, which of the

following statements to do you most agree with:

A. Investment objectives should be return driven, for example based

on the overall targets of the business and the implied investment

return required to achieve those targets.

B. Investment objectives should be risk driven, for example aiming to

maximise the investment return for a chosen level of risk.

C. Investment objectives should consider both risk and return and seek

to target the best trade off between the two.

11/24/2015 12

24/11/2015

7


presentations

Dark blue

R17 G52 B88

Gold

R217 G171 B22

Mid blue

R64 G150 B184



Light grey

R220 G221 B217

Pea green

R121 G163 B42

Forest green

R0 G132 B82

Bottle green

R17 G179 B162

Cyan

R0 G156 B200

Light blue

R124 G179 B225

Violet

R128 G118 B207

Purple

R143 G70 B147

Fuscia

R233 G69 B140

Red

R200 G30 B69

Orange

R238 G116 29

Dark grey

R63 G69 B72

Strategic Investment Risk

• What is investment risk?

• How do our liabilities effect that risk?

11/24/2015 13


presentations

Dark blue

R17 G52 B88

Gold

R217 G171 B22

Mid blue

R64 G150 B184



Light grey

R220 G221 B217

Pea green

R121 G163 B42

Forest green

R0 G132 B82

Bottle green

R17 G179 B162

Cyan

R0 G156 B200

Light blue

R124 G179 B225

Violet

R128 G118 B207

Purple

R143 G70 B147

Fuscia

R233 G69 B140

Red

R200 G30 B69

Orange

R238 G116 29

Dark grey

R63 G69 B72

• Choosing the basis to measure risk is key to investment

strategy:

Choice of Risk Basis

14

• Volatility of (A-L)

• Volatility of the surplus

• Rates Neutral Strategy:

Liability Backing assets

duration matched to

liabilities; surplus

invested in zero

duration assets

Assets – Liabilities (A-L)

• Volatility of (A/L)

• Volatility of the ‘funding

ratio’


All assets duration

matched to liabilities

Assets / Liabilities (A/L)

• Volatility of Assets

• No consideration of

liabilities


zero-duration assets

Asset only

11/24/2015

24/11/2015

8


presentations

Dark blue

R17 G52 B88

Gold

R217 G171 B22

Mid blue

R64 G150 B184



Light grey

R220 G221 B217

Pea green

R121 G163 B42

Forest green

R0 G132 B82

Bottle green

R17 G179 B162

Cyan

R0 G156 B200

Light blue

R124 G179 B225

Violet

R128 G118 B207

Purple

R143 G70 B147

Fuscia

R233 G69 B140

Red

R200 G30 B69

Orange

R238 G116 29

Dark grey

R63 G69 B72

80%

85%

90%

95%

100%

105%

110%

115%

120%

Surp

lus (

% o

f in

itia

l valu

e)

Strategy1: Efficient under Asset Only Strategy 2: Efficient under A-LSource: BlackRock

Does Asset Risk Tell the Full Story?

15

Driven broadly by

liability performance

Driven broadly by

asset performance

• Strategy 1: Efficient in Asset only basis. Money market funds and short credit (FX

matched)

• Strategy 2: Efficient in A-L basis. Fixed income PV01 matched + 10% equity allocation


presentations

Dark blue

R17 G52 B88

Gold

R217 G171 B22

Mid blue

R64 G150 B184



Light grey

R220 G221 B217

Pea green

R121 G163 B42

Forest green

R0 G132 B82

Bottle green

R17 G179 B162

Cyan

R0 G156 B200

Light blue

R124 G179 B225

Violet

R128 G118 B207

Purple

R143 G70 B147

Fuscia

R233 G69 B140

Red

R200 G30 B69

Orange

R238 G116 29

Dark grey

R63 G69 B72

Asset Only Risk Decomposition

11/24/2015 16

• Dominated by FX

• Equity and Rates risk broadly equivalent.

-20

0

20

40

60

80

100

120

140

160

180

200

Ris

k (

bp

s p

.a.)

Source: BlackRock

24/11/2015

9


presentations

Dark blue

R17 G52 B88

Gold

R217 G171 B22

Mid blue

R64 G150 B184



Light grey

R220 G221 B217

Pea green

R121 G163 B42

Forest green

R0 G132 B82

Bottle green

R17 G179 B162

Cyan

R0 G156 B200

Light blue

R124 G179 B225

Violet

R128 G118 B207

Purple

R143 G70 B147

Fuscia

R233 G69 B140

Red

R200 G30 B69

Orange

R238 G116 29

Dark grey

R63 G69 B72

Asset and Liability Risk Decomposition

11/24/2015 17

• Shows risks relative to liabilities

• Now equity and spreads are the key risks.

-20

0

20

40

60

80

100

120

140

160

180

200

Ris

k (

bp

s p

.a.)

Source: BlackRock


presentations

Dark blue

R17 G52 B88

Gold

R217 G171 B22

Mid blue

R64 G150 B184



Light grey

R220 G221 B217

Pea green

R121 G163 B42

Forest green

R0 G132 B82

Bottle green

R17 G179 B162

Cyan

R0 G156 B200

Light blue

R124 G179 B225

Violet

R128 G118 B207

Purple

R143 G70 B147

Fuscia

R233 G69 B140

Red

R200 G30 B69

Orange

R238 G116 29

Dark grey

R63 G69 B72

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00%

Exp

ecte

d R

etu

rn

Risk relative to Liabilities

Efficient allocation of risk

Replacing poorly rewarded risks with an efficient mix

18

G

A

IG

MR

11/24/2015

T

“low risk” Asset Only Strategy

Minimum Risk

Minimum Risk + IG credit

Minimum Risk + IG credit +

Growth

Efficient frontier

Target

24/11/2015

10


presentations

Dark blue

R17 G52 B88

Gold

R217 G171 B22

Mid blue

R64 G150 B184



Light grey

R220 G221 B217

Pea green

R121 G163 B42

Forest green

R0 G132 B82

Bottle green

R17 G179 B162

Cyan

R0 G156 B200

Light blue

R124 G179 B225

Violet

R128 G118 B207

Purple

R143 G70 B147

Fuscia

R233 G69 B140

Red

R200 G30 B69

Orange

R238 G116 29

Dark grey

R63 G69 B72

How to Incorporate Liabilities

11/24/2015 19

Characteristics of

Minimum Risk Portfolio

A - L (Surplus focused) A / L (Funding ratio

focused)

FX exposure Quantity of foreign currency

matches liabilities

Proportion of foreign

currency matches liabilities

Interest rates exposure PV01 matched to liabilities

(lower duration)

Duration matched to

liabilities

(higher PV01)

Effect of market movements

on surplus

Market value of surplus

should be stable

Market value of surplus

should change in line with

liabilities

Effect of market movements

on funding ratio

Funding ratio will change in

opposite direction to

liabilities

Funding ratio should be

stable

Accounting basis Less volatile More volatile


presentations

Dark blue

R17 G52 B88

Gold

R217 G171 B22

Mid blue

R64 G150 B184



Light grey

R220 G221 B217

Pea green

R121 G163 B42

Forest green

R0 G132 B82

Bottle green

R17 G179 B162

Cyan

R0 G156 B200

Light blue

R124 G179 B225

Violet

R128 G118 B207

Purple

R143 G70 B147

Fuscia

R233 G69 B140

Red

R200 G30 B69

Orange

R238 G116 29

Dark grey

R63 G69 B72

Question 4

Which risk framework do you believe is most appropriate for

the key risk measure in a General Insurance business:

A. Asset only

B. Asset minus liabilities (A-L) (i.e. the nominal difference

between the two.)

C. Assets over liabilities (A/L) (i.e. the relative difference

between the two.)

11/24/2015 20

24/11/2015

11


presentations

Dark blue

R17 G52 B88

Gold

R217 G171 B22

Mid blue

R64 G150 B184



Light grey

R220 G221 B217

Pea green

R121 G163 B42

Forest green

R0 G132 B82

Bottle green

R17 G179 B162

Cyan

R0 G156 B200

Light blue

R124 G179 B225

Violet

R128 G118 B207

Purple

R143 G70 B147

Fuscia

R233 G69 B140

Red

R200 G30 B69

Orange

R238 G116 29

Dark grey

R63 G69 B72

Strategic Interest Rate Risk

• Should you be strategically short?

• How should interest rate risk be managed?

11/24/2015 21


presentations

Dark blue

R17 G52 B88

Gold

R217 G171 B22

Mid blue

R64 G150 B184



Light grey

R220 G221 B217

Pea green

R121 G163 B42

Forest green

R0 G132 B82

Bottle green

R17 G179 B162

Cyan

R0 G156 B200

Light blue

R124 G179 B225

Violet

R128 G118 B207

Purple

R143 G70 B147

Fuscia

R233 G69 B140

Red

R200 G30 B69

Orange

R238 G116 29

Dark grey

R63 G69 B72

Is now a good time to be short rates?

-0.1

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0

1

2

3

4

5

6

08/1

3/2

00

7

08/1

3/2

00

8

08/1

3/2

00

9

09/1

3/2

01

0

09/1

3/2

01

1

09/1

3/2

01

2

09/1

3/2

01

3

09/1

3/2

01

4

09/1

3/2

01

5

Sw

ap R

ate

Diffe

rentials

(%

)

Sw

ap R

ate

(%

)

USD 3Y Swap Rate (LHS)

USD 3Y - 2Y Swap Rate Difference (RHS)

P&L Impact of Forward Rate Implied Change in Swap Rates (RHS)

11/24/2015 22

Source: BlackRock

24/11/2015

12


presentations

Dark blue

R17 G52 B88

Gold

R217 G171 B22

Mid blue

R64 G150 B184



Light grey

R220 G221 B217

Pea green

R121 G163 B42

Forest green

R0 G132 B82

Bottle green

R17 G179 B162

Cyan

R0 G156 B200

Light blue

R124 G179 B225

Violet

R128 G118 B207

Purple

R143 G70 B147

Fuscia

R233 G69 B140

Red

R200 G30 B69

Orange

R238 G116 29

Dark grey

R63 G69 B72

How well do Markets Predict Rates?

11/24/2015 23

0

1

2

3

4

5

6

09

/13

/20

08

03

/13

/20

09

09

/13

/20

09

03

/13

/20

10

10

/13

/20

10

04

/13

/20

11

10

/13

/20

11

04

/13

/20

12

10

/13

/20

12

04

/13

/20

13

10

/13

/20

13

04

/13

/20

14

10

/13

/20

14

04

/13

/20

15

10

/13

/20

15

03

/14

/20

16

09

/14

/20

16

Sw

ap R

ate

(%

)

USD 2Y USD 2Y1Y lagged 1YSource: BlackRock


presentations

Dark blue

R17 G52 B88

Gold

R217 G171 B22

Mid blue

R64 G150 B184



Light grey

R220 G221 B217

Pea green

R121 G163 B42

Forest green

R0 G132 B82

Bottle green

R17 G179 B162

Cyan

R0 G156 B200

Light blue

R124 G179 B225

Violet

R128 G118 B207

Purple

R143 G70 B147

Fuscia

R233 G69 B140

Red

R200 G30 B69

Orange

R238 G116 29

Dark grey

R63 G69 B72

What about liquidity?

Asset

Class

1

Week

1

Month

3

Months

6

Months

Cash 100% 100% 100% 100%

Govs 100% 100% 100% 100%

Corp AAA 50% 50% 100% 100%

Corp AA 0% 50% 100% 100%

Corp A 0% 33% 66% 100%

Corp BBB 0% 33% 66% 100%

Covered 0% 33% 66% 100%

Securitised 0% 33% 66% 100%

EMD 0% 25% 50% 100%

Equity 0% 33% 66% 100%

11/24/2015 24

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1 Week 1 Month 3 Months 6 Months

Portfolio Liquidity

1 Year Portfolio 3 Year Portfolio

Does high liquidity requirement justify being short rates?

Source: BlackRock

24/11/2015

13


presentations

Dark blue

R17 G52 B88

Gold

R217 G171 B22

Mid blue

R64 G150 B184



Light grey

R220 G221 B217

Pea green

R121 G163 B42

Forest green

R0 G132 B82

Bottle green

R17 G179 B162

Cyan

R0 G156 B200

Light blue

R124 G179 B225

Violet

R128 G118 B207

Purple

R143 G70 B147

Fuscia

R233 G69 B140

Red

R200 G30 B69

Orange

R238 G116 29

Dark grey

R63 G69 B72

Question 5

With interest rates set to start going up in the US and UK,

what would you choose as your strategic interest rates

position:

A. Short

B. Neutral

C. Long

11/24/2015 25


presentations

Dark blue

R17 G52 B88

Gold

R217 G171 B22

Mid blue

R64 G150 B184



Light grey

R220 G221 B217

Pea green

R121 G163 B42

Forest green

R0 G132 B82

Bottle green

R17 G179 B162

Cyan

R0 G156 B200

Light blue

R124 G179 B225

Violet

R128 G118 B207

Purple

R143 G70 B147

Fuscia

R233 G69 B140

Red

R200 G30 B69

Orange

R238 G116 29

Dark grey

R63 G69 B72

Investment Policy Statement

11/24/2015 26

• Our liabilities are key to our business, therefore their economic

characteristics should be the starting point for our investment strategy.

• Diversification is central to insurance and investments, therefore we

seek a multi asset portfolio including fixed income and growth assets.

• FX exposures are strategically unrewarded.

• The volatility of the surplus (standard deviation of A-L) in nominal terms

is the key risk to our business that investment strategy generates.

• We wish to be as holistic and efficient as possible, taking into account

as much of the business as we can and seeking to maximise expected

return / minimise risk for a given level of risk / expected return.

24/11/2015

14


presentations

Dark blue

R17 G52 B88

Gold

R217 G171 B22

Mid blue

R64 G150 B184



Light grey

R220 G221 B217

Pea green

R121 G163 B42

Forest green

R0 G132 B82

Bottle green

R17 G179 B162

Cyan

R0 G156 B200

Light blue

R124 G179 B225

Violet

R128 G118 B207

Purple

R143 G70 B147

Fuscia

R233 G69 B140

Red

R200 G30 B69

Orange

R238 G116 29

Dark grey

R63 G69 B72

Ongoing Management of Investments How do you implement the investment strategy?

Direct Management against key risk measures?

• Asset manger continuously seeks to add value against objectives and constraints set out through the

investment strategy:

• This tends to be complex, it may be difficult for the asset manager to truly align to the business

• Typically, the asset manager may not have full control over all aspects of the investments

11/24/2015 27

SAA

• Annual SAA review against updated business constraints (capital, liabilities)

• Stress testing of the SAA against tail risk

• ESG based analysis

Benchmarks

• Investable

• Measurable

• Scope for active views

Benchmark Based Investment Management

• The key elements of the investment strategy are

captured in mandate guidelines, including the

definition of risk measures

• The annual SAA is used explore asset

allocations and strategies against a range of

objectives and constraints


presentations

Dark blue

R17 G52 B88

Gold

R217 G171 B22

Mid blue

R64 G150 B184



Light grey

R220 G221 B217

Pea green

R121 G163 B42

Forest green

R0 G132 B82

Bottle green

R17 G179 B162

Cyan

R0 G156 B200

Light blue

R124 G179 B225

Violet

R128 G118 B207

Purple

R143 G70 B147

Fuscia

R233 G69 B140

Red

R200 G30 B69

Orange

R238 G116 29

Dark grey

R63 G69 B72

Translating the Investment Strategy

11/24/2015 28

10%

30%

5% 20%

20%

5%

5% 5%

Cash

Gilts

Corporate AAA

Corporate AA

Corporate A

ABS

Equity

Hedge Funds

Strategic Asset Allocation

Discrete underlying mandates

Mandate

A

GBP Core

Fixed

Income

Investment Strategy

• Action Plan

• Objectives

• Policy

Insurer Asset Manager

Mandate

B

USD Core

Fixed

Income

Mandate

C

EUR Core

Fixed

Income

24/11/2015

15


presentations

Dark blue

R17 G52 B88

Gold

R217 G171 B22

Mid blue

R64 G150 B184



Light grey

R220 G221 B217

Pea green

R121 G163 B42

Forest green

R0 G132 B82

Bottle green

R17 G179 B162

Cyan

R0 G156 B200

Light blue

R124 G179 B225

Violet

R128 G118 B207

Purple

R143 G70 B147

Fuscia

R233 G69 B140

Red

R200 G30 B69

Orange

R238 G116 29

Dark grey

R63 G69 B72

How can Benchmarks remain relevant?

11/24/2015 29

Rates

FX

Liquidity

Strategic

Tactical

Stressed Environment

Asset Allocation Changing Business

X

• The Strategic Asset Allocation is static, reviewed every 1-3 years

– How do you ensure the investments remain relevant?

– How do you build in scope to take active positions relevant to benchmarks?


presentations

Dark blue

R17 G52 B88

Gold

R217 G171 B22

Mid blue

R64 G150 B184



Light grey

R220 G221 B217

Pea green

R121 G163 B42

Forest green

R0 G132 B82

Bottle green

R17 G179 B162

Cyan

R0 G156 B200

Light blue

R124 G179 B225

Violet

R128 G118 B207

Purple

R143 G70 B147

Fuscia

R233 G69 B140

Red

R200 G30 B69

Orange

R238 G116 29

Dark grey

R63 G69 B72

Fiduciary Management (“OCIO”)

11/24/2015 30

Focused Metrics and Management Information

Mandate Review and adjustment;

Strategic Asset

Allocation

Overall Fiduciary Mandate

Management

Dynamic Asset

Management

24/11/2015

16


presentations

Dark blue

R17 G52 B88

Gold

R217 G171 B22

Mid blue

R64 G150 B184



Light grey

R220 G221 B217

Pea green

R121 G163 B42

Forest green

R0 G132 B82

Bottle green

R17 G179 B162

Cyan

R0 G156 B200

Light blue

R124 G179 B225

Violet

R128 G118 B207

Purple

R143 G70 B147

Fuscia

R233 G69 B140

Red

R200 G30 B69

Orange

R238 G116 29

Dark grey

R63 G69 B72

Portfolio

Management

Overall Structure

11/24/2015 31

Mandate

A

Management Information (possibly against Liabilities)

• Rates,

• FX,

• Risk Assets Allocation

• Custom Risk Measures

Overall Fiduciary Mandate Management

Shared risk Platform - Aladdin

Regular Manager

Reporting and Review

Asset Manager Insurer

Investment

Strategy

Strategic Asset

Allocation


presentations

Dark blue

R17 G52 B88

Gold

R217 G171 B22

Mid blue

R64 G150 B184



Light grey

R220 G221 B217

Pea green

R121 G163 B42

Forest green

R0 G132 B82

Bottle green

R17 G179 B162

Cyan

R0 G156 B200

Light blue

R124 G179 B225

Violet

R128 G118 B207

Purple

R143 G70 B147

Fuscia

R233 G69 B140

Red

R200 G30 B69

Orange

R238 G116 29

Dark grey

R63 G69 B72

Implementation Timelines

11/24/2015 32

Months: 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5

Design and Agree Investment

Strategy

Source Asset and Liability Data

Design Risk Measures

Design SAA

ESG and Stress Testing

Design TAA / DAA

Finalise SAA

Design Portfolio Structure

Design Benchmarks

Design Overarching Fiduciary

Mandate

Design Underlying Mandates

Design Reporting

Set out transitioning plan

Transition Assets

Ongoing Portfolio Management

Str

ate

gy

Desig

n

Bu

ild

24/11/2015

17


presentations

Dark blue

R17 G52 B88

Gold

R217 G171 B22

Mid blue

R64 G150 B184



Light grey

R220 G221 B217

Pea green

R121 G163 B42

Forest green

R0 G132 B82

Bottle green

R17 G179 B162

Cyan

R0 G156 B200

Light blue

R124 G179 B225

Violet

R128 G118 B207

Purple

R143 G70 B147

Fuscia

R233 G69 B140

Red

R200 G30 B69

Orange

R238 G116 29

Dark grey

R63 G69 B72

Conclusions

• Investment strategy is an important part of a general

insurance business.

• Investment risk should be defined and measured relative

to the economic characteristics of the liabilities.

• Strategic allocations should aim to be efficient, avoiding

poorly rewarded risks and delegating opportunistic

positioning.

11/24/2015 33


presentations

Dark blue

R17 G52 B88

Gold

R217 G171 B22

Mid blue

R64 G150 B184



Light grey

R220 G221 B217

Pea green

R121 G163 B42

Forest green

R0 G132 B82

Bottle green

R17 G179 B162

Cyan

R0 G156 B200

Light blue

R124 G179 B225

Violet

R128 G118 B207

Purple

R143 G70 B147

Fuscia

R233 G69 B140

Red

R200 G30 B69

Orange

R238 G116 29

Dark grey

R63 G69 B72

11/24/2015 34

Questions Comments

The views expressed in this presentation are those of invited contributors and not necessarily those of the IFoA. The IFoA

do not endorse any of the views stated, nor any claims or representations made in this presentation and accept no

responsibility or liability to any person for loss or damage suffered as a consequence of their placing reliance upon any

view, claim or representation made in this presentation.

The information and expressions of opinion contained in this publication are not intended to be a comprehensive study,

nor to provide actuarial advice or advice of any nature and should not be treated as a substitute for specific advice

concerning individual situations. On no account may any part of this presentation be reproduced without the written

permission of the authors, James Kenney and Henry Ashworth.

Strategic Investment Risk · A. Investment objectives should be return driven, for example based on the overall targets of the business and the implied investment return required

Documents